Flashcards in Evidence Deck (41):
The statement of Atteststation standards suggests two basic types of evidence collection procedures:
1) Search and verification - procedures include procedures such as inspecting assets, confirming receivables, and observing the counting of inventory
2) Internal inquieries and comparisons - procedures include discussions with firm representatives and analytical procedures such as ratio and analysis.
AU-C 540 suggetst that auditor's objectives relating to estimates are to determine that all estimates:
1) have been developed
2) are reasonable
3) follow gAAP
There are two types:
1) substantive analytical procedures 2) tests of details of tranactions, account balances, and disclsoures.
What is Analytical procedures?
consists of valuations of financial information made by a study of plausible relationships among financial and nonfinancial data. Used as follow:
risk assessment - identify aspects of the entity of which the auditor was unaware and assist in assessing the risks of material missatement. As such, these tests help the auditor determine the nature, timing, and extent of tests.
substantive procedures - obtain relevant and reliable audit evidence to substantiate accounts for which overall comparisons are helpful.
near the ned of audit - assess conlusions reached and evaluate overall FS presentations.
When developing expectations, the auditor shoudl attempt to identify plausible relationships. These expectation may be derived from:
1) The information itself in prior periods.
2) Anticipated results such as budgets and forecasts
3) Relationships among elements of fiancial info. within the period.
4) Industry informaoitn
5) Relevant nonfinancial information.
Relationships differ in their predictability. They are:
relationships in a dynamic or unstable environemnt are less predictable than those in a stable environment.
relationships invovling BS accounts are less predictable than income statement accounts (because BS accounts represent balances at one arbitrary point in time).
relationships involving management discretion are sometimes less predictable (e.g., decsiion to incur maintenance expense rather than replace plant).
limitations to anlytical procedures:
1) the guidelines for evaluation may be inadequate
2) It is difficult to determine whether a change is due to a misstatemnet or result of random changei nthe account.
3) cost-based accounting records hinder comparions between firms of different ages/asset compositions.
4) accounting differences hinder comparisons between firms.
5) Analytical procedures present only "circumstantial" evidence in that a "significant" diference will ead to additonal audit procedures.
Consider two possible approaches for auditing an account
1) Direct tests of ending balance (tests of balances)
Ex. for high turnover accounts such as cash, acocunts receivable, acounts payable, etc. to confirm the year end balances.
2) tests of inputs and outputs during the year - used most extensively for loewr turnover accounts. e.g, fixed assets, long-term debt, etc.
You could use both approaches!
PCAOB standard containts documetnation requiresments for aduits and reviews of issurs:
1) The documentation should demonstrate that the egangement complied with PCAOB standards.
2) the documentation completion period is 45 days (not 60 days) following the report release date.
3) the retatnion period is 7 years (rather than 5).
The differences relate to AICPA standards.
Working trail balnace ?
- a list of ledger acocunts with current year-end balnces , with columns for adjusting for final baneces for the current year.
schedules that summarize like acocunts, the total of which typically tranferred to the working trial balance. ex., a client's various cash acocunts may be summarized on a lead schedule with only the total cash being transferred to the working trial balance.
The bomination of numbers and/or letters given to a workpaper page for indetifcaiton and orgazation purposes. ex., cash workpaper may be indexed A-1.
When the same infromation is included on two workpapers, auditors indicate on each workpaper the index of the other workpaper containing the identical information.
Current workpaper files?
files that contain corroborating info. pertaining to the current year's audit program. ex. cash confirmation.
permanent workpaper files?
the fiels that contian ifnormatoin that is expecetd to be used by by the auditor on many future audits of a client . ex. copies of articles of incorp and bylaws, schedules of ratios by year, analyses of cap. stock accounts, debt agreements, and internal control.
How to uncover kiting?
by preparing a bank transfer schedule or by obtaining a cutoff statemnet for the first city account.
a bank transfer schedule shows the dates of all transfers of cash among the client's various bank acocunts.
With bank reconciliations, the four column approach will allow the auditor to reconcicle:
1) All cash receipts and disbursements recorded on the books to those on the bank statement and
2) All deposits disbursements recorded on the bank statemnts to the oboks.
A four-column reconciliation will not allow the auditor to verify whether
1) checks written have been for the wrong mounts and so recorded on both the books and the bank statemnet, and
2) unrecorded checks or deposits exist that have not cleared the bank.
1) Bank cutoff statements:
a cutoff statemnet is a bank statemnt for the first 8-10 days after year end. purpose is to verify reconciling items. The statement is sent directly by the bnak to the auditor.
standard confirmation form:
use to obtain informatoin from financial instutions. The form request informatoin on two types of balances - deposits and loans. know that the form is deisnged to substantiate evidence primarily on the existence assertion, and not to discover or provide assurance about accounts not listed on the form.
how to detect lapping?
occurs when one individual has responsiblity for obht recordkeeping and custody of cash. best way to contorl it is with seg. of duties and thereby make its occurence difficult, it may be detected by using the following procedures:
1) analytical procedures - calculate age of receivables and turnover of receivables.
2) confirm receivables - investigate exception noted, emphasize accounts that have been written off, and old accounts.
3) deposit slips - obtain authenticated deposit slips from bank and compare names, dates, and amounts on remittance advices to infomraiotn on deposit slips.
4) bookkeeping system - compare remittance devices with informatoin recorded.
Confirmation of receivables?
confirm unless 1) accounts receivable are immateiral
2) confirmations would be ineffective as an audit procedure
3) the combined assessment of inherent and contorl risk is low, and that assessment with other substantive evidence, is sufficient to reduce audit risk to an acceptably low level.
Negative confirmation request may be used when
1) the combined assessed level of inherent risk and control risk is low.
2) A large number of small balnaces is insvolved,
3) The auditor has no reason to believ that recipients are unlikely to give them adequate consierations.
The auditor may consider not perfomring altnerative procedures for confirmation of receivable if
1) no unusual qualitative factors or systematic characteristics realted to reponses have been indetified
2) tthe nonresponses in total, when projeceted as 100% misstatements to the pop., are immaterial.
To asess the qualifcaitons of the specialist
The CPA should consider specialist profesisonal certificaiotn, repurtation, and experience in the type of work under consideraiotn.
Auditors should obtain an adequate undersatnding of hte methods or assumptions used by the speicalist to detemrine that they are not unreasonable
A specialist is not referred to in the auditor's report unless such a reference would help report users to understhe need for an explanatory paragraph or a departuer form an unmodified opinion.
Conditions arising after the balance sheet date, consider for note disclosure
perform audit procedures to serach for subsequent events.
If a predceessor auditor's reissuance of the auditor's report on comparative FS. the predecessor should
read the subsequent period FS, compare with prior year FS, and obtain a represetnation letter form management.
review near the end of the audit ordinarily would include considering
(1) the adequacy of evidence gathered in response to unexpected balances, and (2) unusual or unexpected balances or relationships that were not previously identified.
In obtaining written representations from management, there are no materiality limits ordinarily would apply to representations related to
(1) management’s acknowledgement of its representation for financial statement fair presentation, (2) availability of stockholder and committees of the board of directors meetings, and (3) communications from regulatory agencies concerning noncompliance.
lawyer’s response to an auditor’s request for information concerning litigation, claims, and assessments will ordinarily contain:
response will ordinarily contain an explanation of the limitations on the scope of the response. The lawyer will appropriately limit the response to matters which he has given substantive attention to, and to matters that are considered material to the financial statements. These limitations are not limitations on the scope of the auditor’s examination.
search for unrecorded liabilities is performed near
the completion of the audit in large part using transactions recorded after year-end to determine that proper cutoffs have been made.
When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for
Updating the report on the previous financial statements regardless of the opinion previously issued.
The assertions embodied in MD&A include
2)Consistency with financial statements
4)Presentation and disclosure
A CPA is engaged to examine an entity’s financial forecast. The CPA believes that several significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue a(n)
Entity-level controls vary in nature and precision.
(1) Some entity-level controls have an important but indirect effect on the likelihood of misstatement (e.g., certain control environment controls such as tone at the top). These controls might affect the other controls the auditor decides to test, and the nature, timing and extent of procedures performed on other controls.
(2) Some entity-level controls monitor the effectiveness of other controls, but not at a level of precision that would address the assessed risk that misstatements will be prevented or detected (e.g., controls that monitor the operation of other controls). These entity-level controls, when operating effectively, might allow the auditor to reduce testing of the other controls.
(3) Some entity-level controls by themselves adequately prevent or detect misstatements. If an entity-level control sufficiently addresses the risk of misstatement, the auditor need not test additional controls related to that risk.
1.Relating to the control environment.
2.Pertaining to the company's risk assessment process.
3.Addressing policies over significant risk management practices.
Auditor's responsibility (section with this heading)
1. Express an opinion based on audit.
2. Audit conducted in accordance with GAAS of USA.
3. Standards require auditor to plan and perform audit to obtain reasonable assurance financial statements free of material misstatement.
4. Discuss nature of audit procedures.
5. Audit evidence sufficient and appropriate for opinion.
What are trust service principles?
O- Online Privacy
P- Processing Integrity
A for Availability
Security, Availability, Processing Integrity, Online Privacy, and Confidentiality.
An auditor’s decision whether to apply analytical procedures as substantive tests usually is determined by the
Precision and reliability of the data used to develop expectations.
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would
tests of controls may be used to support a lower level of the assessed risk of misstatement, and thereby restrict audit risk appropriately.
Type 2—disclose in notes to the financial statements
Sale of bond or stock issue
Purchase of a business
Litigation settlement, but only when the litigation is based on a post-balance-sheet event
(a) Because of the time involved with litigation, this would presumably be rare
Fire or flood loss
Receivable loss, but only when the loss occurred due to a post-balance-sheet event such as a customer’s major casualty arising after the balance sheet date